UK’s second-largest city declares itself bankrupt. Here’s why and what it means

The UK’s second-largest city has essentially declared itself bankrupt, according to several media reports. The Birmingham Council, which provides services to more than a million people, on Tuesday filed a Section 114 notice. The city has shut down all spending barring essential services. But what happened? And what does this mean for the UK? Let’s take a closer look: What happened? As per CNN, the deficit occurred due to the city being unable to pay between £650 million and £760 million in equal pay claims. The city says it is now projecting an £87 million deficit for the 2023-24 financial year. As per The Evening Standard, the Birmingham Council has thus far paid out more than one billion pounds after a discrimination case from employees. The 174 employees – most of them women working as teaching assistants, cleaners and in catering – did not receive bonuses given to staff in traditionally male positions.. They also blamed “long-standing issues”, including the roll-out of a new computer system, for an £87 million (US$109 million) hole in its £3.2 billion-a-year budget. The council said the parlous state of its finances had been compounded by “rampant inflation” – currently the highest in the G7 – increases in the cost of adult social care and reductions in business rates. The outlet quoted Birmingham council deputy leader Sharon Thompson as saying the city faces “longstanding issues, including the council’s historic equal pay liability concerns.” The move halts spending on all services barring funds for essential services, as per The Guardian. This comes months after the council declared a freeze on nonessential spending in July and even launched a voluntary resignation scheme for its employees in order to tamp down on spending.

The councillors now have three weeks to come up with an action planto tackle the shortfall.

Metro.UK quoted Thompson as saying that this was a necessary move to ‘get our city back on sound financial footing’. She said: ‘I want to stress that despite the significant challenges that we face, we will prioritise core services that our residents rely on in line with our values of supporting the most vulnerable in this city. Birmingham isn’t alone As per The Evening Standard, in recent years, Thurrock, Croydon, Slough and Northamptonshire councils have all been forced to issue Section 114 notices. What does this mean for the UK? The development has already devolved into a political battle between local Labour council and the ruling Tory government. Thompson, claiming that local governments are facing a ‘perfect storm’ across Britain, slammed the ruling Conservative Party. [caption id=“attachment_13084632” align=“alignnone” width=“640”] Rishi Sunak’s government has wiped its hands off the matter.[/caption] Thompson claimed that successive Tory governments took away around £1 billion of funding from the council, as per CNN. “Like councils across the country, it is clear that this council faces unprecedented financial challenges, from huge increases in adult social care demand and dramatic reductions in business rates incomes, to the impact of rampant inflation,” she told the outlet. “Whilst the council is facing significant challenges, the city is very much still open for business and we’re welcoming people as they come along,” she added. Jonathan Carr-West, chief executive of the Local Government Information Unit (LGIU), told The Guardian the development spoke to larger issues facing local councils. “The LGIU has been supporting councils for 40 years, but our members tell us that they are experiencing the most acute crisis they can remember,” he said. “Central government has kept councils living from hand to mouth and from year to year for far too long. Birmingham is the biggest council to fail so far, but unless something changes, it won’t be the last.” Clive Betts, Labour chair of the House of Commons select committee on levelling up, housing and communities, told the newspaper, “If you look at all the problems that various councils have had in the last couple of years or so, you’ve got particular factors in all of them – but you’ve also got an underlying problem that local government has had bigger cuts than any other part of the public sector since 2010.

“The likelihood is we’re going to see more councils getting into difficulties.”

The Institute for Government think tank said the spending power of local authorities in England – how much they receive in grants from central government, local housing taxes and business rates – fell by 17.5 per cent from 2009-10 to 2019-20. But despite a partial recovery, in 2021-22 it was still 10.2 per cent below 2009-10 levels, assessing that central government funding had been cut by up to 40 per cent in the first decade of Tory rule.

SIGOMA, a grouping of 47 urban councils within the Local Government Association (LGA), last week warned that one in 10 of its members were considering making the statutory admission that they have no prospect of balancing their books.

Nearly 20 per cent said they could do the same in the next year, putting frontline services run by councils such as social care, transport, housing and education at risk of further cuts.

SIGOMA chairman Stephen Houghton said: “The government needs to recognise the significant inflationary pressures that local authorities have had to deal with in the last 12 months”.

He added: “The funding system is completely broken. Councils have worked miracles for the past 13 years, but there is nothing left”.

Conservatives hit back But Sunak’s government has wiped its hands off the matter. A spokesperson for the prime minister told reporters on Tuesday, “Clearly it’s for locally elected councils to manage their own budgets.” The spokesperson added that the government has been “engaging regularly with them to that end and has expressed concern about their governance arrangements and has requested assurances from the leader of the council about the best use of taxpayers’ money.” Sunak’s official spokesman said Birmingham had received a more than nine per cent increase in additional funding from a pot of £5.1 billion for local councils this year.

Metro.UK quoted Conservative leader Robert Alden as saying the situation was ‘embarrassing for this great city’.

Alden added that it was ‘cloud cuckoo land’ to claim that other councils across the UK are facing similar issues. “Labour’s failure in Birmingham has become clear for all to see, what Labour pledged was a golden decade ahead to voters in 2022 turns out to be based on budgets in 20/21 and 21/22 that did not balance and were unfunded. Combined with Birmingham Labour’s refusal to deal with equal pay over the last decade this has created this mess where residents will now lose valuable services and investment.” With inputs from agencies